¶ Corporate Law Cases

209 terms by ywacyt19

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SEPARATE ENTITY DOCTRINE 0.

1. Separate legal identity of companies established.
2. While legislation was intended to prevent individuals from distancing themselves from the liability of their own economic acts, the HoL could find nothing in what he did contrary to the legislation's letter.

Salomon v Salomon

Stolen.

Salomon controls company through wife and kids - sets himself up as a secured creditor. Unsecured creditor appears; business becomes insolvent. Appointed liquidator tries to sue Salomon for using a sham device to avoid paying debts. Argued agency. Accepted. CoA rejects - company was held on trust. HoL considers.

SEPARATE ENTITY DOCTRINE 1. Implications

Property owned by a company does not belong to its members, even where they have given it to the company in exchange for shares.

Macaura v Northern Assurance Co Ltd

SEPARATE ENTITY DOCTRINE 2. Implications

Companies can make contracts with shareholders (even controlling ones).

Lee v Lee's Air Farming

LIFTING THE CORPORATE VEIL 1. Statutory departures; insolvency

Payroll tax was voluntarily incurred as it resulted from hiring an employee.

Commissioner of State Taxation WA v Pollock

LIFTING THE CORPORATE VEIL 2. Statutory departures; insolvency

Company sales tax was not a debt incurred voluntarily.

Castrisios v McManus

LIFTING THE CORPORATE VEIL 3. Statutory departures; insolvency; defences

Reasonable grounds to suspect solvency—objective assessment: take into account known facts, and facts that should have been known.

CBA v Freidrich

LIFTING THE CORPORATE VEIL 6. Common law departures; fraud

• Property was transferred at over value, original company made massive profit, court prepared to go behind veil to persons who made profit.
• The court is prepared to lift the corporate veil where the company has been used to perpetuate fraud.

Re Darby

LIFTING THE CORPORATE VEIL 7. Common law departures; fraud

Committing statutory fraud is sufficient to lift the veil; the veil will be lifted where the company is used to evade existing legal obligations.

Re H

Used company to defraud authority.

LIFTING THE CORPORATE VEIL 8. Common law departures; evading existing legal obligations

Court will lift the corporate veil where it is satisfied that the company was formed for the purpose of avoiding existing legal obligations as a device or stratagem.

Gilford Motor Co Ltd v Horne

LIFTING THE CORPORATE VEIL 9. Common law departures; evading existing legal obligations

Corporate veil lifted where company is formed to avoid the recognition of other claims in equity to property attributed to the company.

Jones v Lipman

LIFTING THE CORPORATE VEIL 11. Common law departures; evading existing legal obligations

A court is not entitled to lift the corporate veil because the corporate structure has been used to ensure legal liability re future activities will fall elsewhere. The right to use a corporate structure in this manner is inherent in our corporate law.

Adams v Cape Industries, per Slade LJ

LIFTING THE CORPORATE VEIL 11. Common law departures; under resourced companies

• Filmmaking UK company with only $100 capital, no staff nor permanent place of business—held to be mere agent of US parent. (Couldn't have possibly made the film in evidence itself.)
• Where companies are under resourced, the court might conclude that the company is the agent of its controller

Re FG (Films) Ltd

LIFTING THE CORPORATE VEIL 12. Common law departures; under resourced companies

Atkinson J's guidance for sham/device company (warning: Lecturer Atkinson wrong, case bad decision, and since overruled):
• (1) Were the profits of the business treated as profits of the parent?
• (2) Did the parent appoint the person carrying on the business?
• (3) Was the parent the head and brain of the trading venture?
• (4) Did the parent make the profits by its skill and direction?
• (5) Was the parent in effectual and consistent control?

Young J: So long as the law permits people to erect structures with meaningful legal consequences they need to take the consequences of that decision for bad or worse.

2. (Present) Indicia of sham companies: 100% shareholding, identical directors, no separate accounts, no tenancy agreement, no rent paid, no assignment of the business to subsidiary, no remuneration to directors in capacity as directors of subsidiary.

Smith, Stone & Knight Ltd v Birmingham Corporation

Compulsory acquisition of land of SSK's subsidiary. To obtain compensation for disruption of business, SSK had to demonstrate that it operated the business on the land. BC relied on Salomon to argue the separation of the subsidiary.

LIFTING THE CORPORATE VEIL 12. Common law departures; under resourced companies

Imports SSK v Birmingham Corporation

Spreag v Paeson

CORPORATE GROUPS 1.

Enterprise theory endorsed - corporate group should be treated as one, rather than separately so as to be defeated on a technical point.

(Enterprise theory: economic argument for internalizing externalities. Someone is put at rise, while your enterprise stands to profit → therefore, you should have to remedy/take into account that risk. This case concerns applying enterprise theory to groups. C.f. Adams v Cape Industries, per Slade LJ.)

DHN v Borough of Tower Hamlets

CORPORATE GROUPS 2.

1. Companies in a group remain separate legal entities.
2. Profits earned by subsidiary could not be treated as profits of holding company until such time as the decision to declare dividends is made.
3. Cautiously approves Dimbula Valley re unrealized reevaluated asset gains.

Industrial Equity v Blackburn

CORPORATE GROUPS 3.

1. Enterprise theory rejected - fundamental principle is that each of the companies was a separate and independent legal entity.
2. In making management decisions, directors are supposed to consult the interests of that company (including its creditors) and those interests alone, rather than of the group as a whole.
3. Even 100% ownership is not sufficient to imply (on its own) a relationship of agency between company and controller.

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'; corporate groups.

4. Preferred objective test with regard to corporate groups and 'interests of the company': Each company in a group is a separate, independent legal identity and it is the duty of a director to consult its interests and its interests alone in deciding whether payment should be made to other companies.
(Sell also Charterbridge v Lloyd's Bank)

Walker v Wimborne, per Mason J

Directors of company caused Asiatic to make payments to two other companies of which they were directors. Asiatic itself did not own any shares in either. The directors were moving money around companies in group, for implied promise to repay. Asiatic went insolvent. Liquidator appointed.

CIVIL & CRIMINAL LIABILITY 1.

A company's active and directing will must be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation.

Viscount Haldane in Lennard's Carrying Co v Asiatic Petroluem Co

STATUTORY CONTRACT 1. Implications.

• (1) The statutory contract cannot be enforced by outsiders
• (2) members are bound or entitled only in their capacity as members.

ELEY v POSITIVE LIFE

Constitution provides 'P shall be solicitor'. P later joins group, and is later removed as solicitor. Sues for breach of company constitution.

STATUTORY CONTRACT 2. Implications.

• (1) Clause in constitution stipulating disputes to be resolved by arbitration sufficient to defeat an action brought before court.
• (2) Members are bound by the statutory contract in any disputes arising in relation to the affairs of the association.

HICKMAN v KENT OR ROMNEY SHEEP BREEDERS' ASSOCIATION

STATUTORY CONTRACT 3. Procedural irregularities.

Procedural irregularity of member resolution need not be inadvertent for CA s1322 to apply; court can still hold a deliberate meeting invalid if it causes injustice.

RE PEMBURY

Deliberate irregularities to member resolution - short notice and no quorum. Would not make any difference to outcome.

STATUTORY CONTRACT 4. Procedural irregularities.

Deliberate convention of an irregular meeting is not a mere procedural irregularity.

RE P W SADDINGTON AND SONS

Members travel long distance, and find that they don't have a quorum. Directors continue with meeting anyway.

Young J: Interesting situation if meeting was held where members came from long distance, and at the commencement there was no quorum, and meeting held with a view to be ratified later. However, the section does not cover cases where members are deliberate.

STATUTORY CONTRACT 5. Outsider rights.

Quasi-partnership nature of the company justified treating a provision referring to contractual relationship between director and member as referring to the director in his capacity as member.

RAYFIELD v HANDS

Quasi-partnership small company. Provision requires directors to purchase a departing member's shares - is this part of the statutory contract, or a case of outsider rights?

STATUTORY CONTRACT 6. Outsider rights;

1. Implies that Shareholders have a right to ensure that company is operated pursuant to Constitution (English authority, not much followed in Australia).
2. When altering constitution, simple majority is insufficient. Needs Special resolution.

DIVISION OF RESPONSIBILITY 12. Shareholder interference with board.

1. Shareholder got an injunction restraining company from breaching constitution.

QUIN & AXTENS v SALMON

STATUTORY CONTRACT 7. Outsider rights.

1. A director exceeding the term permitted by the company constitution infringes the personal rights of member; hence, they may sue for breach of statutory contract.
2. Victorian case following Quin & Axtens v Salmon

KRAUS v JH LLOYD

STATUTORY CONTRACT 8. Outsider rights; constitutional alteration.

1. A 'special contract' can arise from implication in the terms of a company constitution, separate from the terms therein (e.g. by implication from the fact that pre-membership applicants are granted rights)
2. The terms of the special contract are a matter of construction; generally, parties cannot be taken to intend that the terms of the special contract would vary in accordance with the changes to the company constitution.
3. Alterations to the constitution will apply to special contracts made after the alterations, or, alternatively, upon a notional 'renewal' of contract.

BAILEY v NSW MEDICAL DEFENCE UNION LTD

Bailey is insured by NSWMDU per constitution for medical negligence defence. NSWMDU changes constitution, reducing coverage amount. Bailey's estate sues for breach of contract - however, if this was the statutory contract, the claim would come to nothing - the constitution was altered legally.

STATUTORY CONTRACT 9. Remedies.

1. The remedy for breach of the constitution by the company is injunction or declaration, not damages.
2. s563A CA postpones claims owed by a company to a person in the person's capacity as a member of the company until after other creditors have been paid.

WEBB DISTRIBUTORS (AUST) v VICTORIA

STATUTORY CONTRACT 10. Remedies

1. A claim brought against a company under CA s2042H for false and misleading conduct does not fall under the member debt postponement of s563A, owing (in part) to the nature of consumer and investor protection statutes, which apply to the whole investing public, rather than merely to members.

SONS OF GWALIA v MARGARETIC

M buys shares on open market in company which subsequently became insolvent. M sues for false/misleading information. If he wins, he would get a debt for damages - is this debt owed to him in his capacity as a member? If so, postponed by s563A.

STATUTORY CONTRACT 11. Remedies

Rectification not available for breach of statutory contract.

SCOTT v FRANK F SCOTT

STATUTORY CONTRACT 12. Constitutional alteration; restriction.

Traditionally, the company could not be party to a shareholder contract not to alter the constitution. (Note: current drafting of s 136 suggests this may no longer be a problem.)

RUSSELL v NORTHERN BANK

STATUTORY CONTRACT 13. Constitutional alteration; restriction.

The constitution can be entrenched by weighted voting rights.

BUSHELL v FAITH

Three directors, who were equal shareholders in the company. The constitution provided that on a resolution to remove a director, the shares of that director would carry three votes.

STATUTORY CONTRACT/SHARES: Class rights protection.

1. Class rights do not need to be created by express reference to the constitution.
2. Where shares are divided into groups and holding a group of shares gives the holder particular rights, the groups are different classes of shares.

CRUMPTON v MORRINE HALL

Home unit company. No express reference in constitution to classes of shares, but shares divided into groups. Moreover, holding a group of shares entitled the holder to use a particular home unit identified with that group of shares.

STATUTORY CONTRACT 15. Class rights protection.

1. The definition of class rights extends to rights or benefits that, although not attached to any particular shares, were nevertheless conferred on the beneficiary in the capacity of member or shareholder of the company.
2. Three situations:
(a) rights or benefits annexed to particular shares (e.g. rights to a dividend)—these are personal rights. If they are rights not held by other held by other members, then class rights;
(b) rights conferred on individuals not in the capacity as members but for ulterior reasons (e.g. Eely v Positive life outsider rights). These cannot be class rights;
(c) rights or benefits that, although not attached to particular shares, nonetheless conferred on beneficiary in capacity as member. [Can be class rights for same reason as (a)]

(Hence X's right to appoint a director could only be taken away with rules on class rights.)

CUMBRIAN NEWSPAPERS

X had right to appoint a director, provided he held 10% of shares, but not a specific 10%. Was this a class right, hence subject to rules of variation?

STATUTORY CONTRACT 16. Class rights protection.

1. Issuing further shares in a class does not alter, affect, modify, or abrogate the substance of the rights of the original class members.
2. The law draws a distinction between variations to class rights and mere variations in the enjoyment of class rights.
(Hence on facts not a variation. The rights of the preference shares will be the same before and after the variation.)
3. Overrruled by s246C!!

WHITE v BRISTOL AEROPLANE CO

The directors proposed to issue bonus preference shares to the ordinary shareholders. Preference shareholders cranky. They claimed their rights were being varied because their voting rights were thusly being diluted.

DIVISIONS OF RESPONSIBILITY 3. General meeting.

The general law doctrine of unanimous consent has the effect that where all members who are entitled to attend and vote have waived meeting formalities, they will be bound by decisions.

RE DUOMATIC

DIVISIONS OF RESPONSIBILITY 4. General meeting.

• (1) The duomatic principle will not apply if any member is excluded, even if that member doesn't have a right to vote.
• (2) 2. Right to harass directors is sufficient for the need for notice of a general meeting, and calling—Re Express Engineering Works principle not applied.

RE COMPACTION SYSTEMS

Facts: Liquidator of company O had documents that led him to assume company C—a wholly owned subsidiary of O—would be wound up. Liquidator purported to informally resolve that C be wound up. M was a holder of one non-voting share in C. M sought orders for winding up be set aside.

Resolution: The non-voting shareholder was entitled to receive notice of the meeting under the constitution. The informal resolution was therefore not effective.

DIVISIONS OF RESPONSIBILITY 5. General meeting.

Obiter that the duomatic principle will not apply where there is a statutory requirement to hold a meeting (as opposed to a replaceable rule).

BODIKIAN V SPROULE, per Austin J.

DIVISIONS OF RESPONSIBILITY 6. General meeting.

Directors have a fiduciary duty to disclose material information such to fully and fairly inform members to make the decision whether to appear at the GM and which way to vote.

FRASER v NRMA HOLDINGS

Challenge to demutualization of NRMA by 2 directors. Complaint was that the other directors were telling inaccurate misrepresentations.

DIVISION OF RESPONSIBILITY 7. General meeting.

The general meeting does have reserve power where board is unable/unwilling to act. However, the constitution conferred power on general meeting to appoint additional directors to resolve a deadlock of this kind. Hence, no scope for the reserve power to act.

MASSEY v WALES

DIVISION OF RESPONSIBILITY 8. Directors

After resignation retention of top level management functions over extended period is sufficient to be deemed a de facto director.

DEPUTY COMMISSIONS OF TAXATION v AUSTIN

DIVISION OF RESPONSIBILITY 10. Directors

1. Directors not entitled to renumeration unless provided for in constitution or general meeting resolves to.

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'

2. Bona fides cannot be the sole test, or a lunatic could conduct the company in a manner perfectly bona fide yet perfectly irrational: The objective aspect of the test 'leaves open an avenue for judicial intervention'. If the decision is one that no reasonable director acting upon proper considerations could properly reached, the court can strike it down.
3. 'Interests of the company' allows but does not necessarily include employees: There are to be no cakes and ale except as in the interests of the company; means to an end of producing profitability. Employee's interests might take a back seat where company no longer a going concern:

HUTTON v WEST CORK RAILWAY CO

Directors to take employees out for trip to zoo. Challenged as not in good faith in interests of company.

DIVISION OF RESPONSIBILITY 11. Shareholder interference with board.

• (1) A majority at general meeting could not override views of directors.
• (2) Rejection of idea that directors were agents of shareholders.

AUTOMATIC SELF-CLEANSING

Board had power of management and power to sell property. Shareholders passed ordinary resolution directing board to sell company's undertaking/business. The board refused to sell.

DIVISION OF RESPONSIBILITY 13. Shareholder interference with board; directors; general meeting

1. If powers of management are vested in the directors, they and they alone can exercise these powers.
2. Shareholders cannot usurp the powers vested in directors any more than the directors can usurp the powers vested in the shareholders.
3. Directors issues cannot be solved by shareholders passing an ordinary resolution.

John Shaw & Sons (Salford) v Shaw

DIVISION OF RESPONSIBILITY 14. Shareholder interference with board; duomatic principle.

Powers of members to bind company depends on constitution; where board exclusively vested with powers of management, shareholders are not similarly empowered via general meeting.

RE EXPRESS ENGINEERING

DIVISION OF RESPONSIBILITY 15. Shareholder interference with board

If directors deadlocked, decision making power reverts to general meeting (interpreted narrowly in Massey v Wales).

BARRON v POTTER

CORPORATE CONTRACTING 1. Limitations on powers.

• (1) Someone dealing with the company was not bound to do anymore than read the constitution.
• (2) Allows third parties to assume that internal procedures were complied with, provided there is something to indicate that they have: a record or a representation by someone with actual authority—Northside interpretation.

ROYAL BRITISH BANK v TURQUAND

CORPORATE CONTRACTING 2. Limitations on powers.

1. Shareholders in general meeting can ratify the directors for breach, unless the interests of creditors intrude.

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'

2. 'Interests of the company' includes creditors: "It is in a practical sense [the creditor's] assets and not the shareholder's assets that...are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration".

Kinsela v Russell Kinsela

Mr and Mrs K caused company to grant lease on favourable terms, thereby reducing assets available to creditors, to Mr and Mrs K. As shareholders, they passed resolution in GM ratifying transaction. Company goes insolvent. Main asset of company has gone to Ks. Liquidators acting on behalf of creditors sue Mr and Mrs K for breach of duty to act in interests of company.

CORPORATE CONTRACTING 3. Limitations on powers.

1. Directors have the power to carry on the management of the company, including changing the direction of the company, but if one gets to the situation where one can say the substratum has gone, then any member can petition the court to wind it up and get his investment back on the basis that the corporate purpose has come to an end.
2. The court will not make a winding up order where the evidence is not strong enough to demonstrate that the business conducted prior to now was, in the mind of the incorporators, the only (or principal) business to be carried out - in modern business, one tends not to stay in the one locality for the whole life of the corporate enterprise.
3. It should not be readily assumed that corporators intend restriction forever to carry on business in a certain way, and to give any member the veto against the business changing.

MINORITY PROTECTION: winding up

4. Where the objects become impossible/there is a failure of substratum, these are relevant factors in the court determining to order winding up on the just and equitable ground (s 416(1)(k).

STRONG v J BROUGH & SON

Facts: No objects clause. Argued that all members understood company would only carry on a real estate business.

CORPORATE CONTRACTING 4. Actual authority; implied

1. Actual authority can be implied by the acquiescence of the board or other persons with actual authority; acquiescence requires consent of all board members, plus communication of that consent to each other and the agent .
2. Usual authority and apparent authority will often coincide, but apparent authority is broader - there is no requirement for acquiescence.
3. CEOs have broad usual authority.

HELY-HUTCHISON

CORPORATE CONTRACTING 5. Authority by construction

A managing director has the usual authority to deal with everyday matters, to supervise the daily running of the company, to supervise the other managers, and generally be in charge of the business of the company.

ENTWELLS

CORPORATE CONTRACTING 6. Authority by construction.

Managing director had authority to borrow money to deal with cash flow problems, but no authority to borrow for capital purposes.

GREEN v MELTZER

CORPORATE CONTRACTING 7. Authority by construction.

1. Approves the Freeman & Lockyer 'ostensible authority' criteria in Australia.
2. Close attention must be paid to the powers of managing directors; the usual authority of Managing Directors to appoint agents can be limited by the constitution. (Managing director has usual authority to authorise agents to make contracts of the kind a managing director can make.)
3. Representations cannot be said to be made by the board where one member remains unaware. Where constitution requires unanimity, lack of any consent is fatal.

CRAB-TREE VICKERS v ADMA

P McWilliam purports to enter contract on behalf of ADMAA (printing machine).
Order form is signed P McWilliam, per B McWilliam.
There are two B McWilliams though: Snr was the chair, and Jnr was the MD.
MD found in facts to lack actual authority: Constitutional limitation provided that actual authority could only be conferred by joint resolution of board. Jnr as MD did not have actual authority.
Board could not be said to have represented P as authorized; Snr did not consent.
(Contract was held not to bind company).

CORPORATE CONTRACTING 8. Authority by construction; Indoor management

1. The indoor management rule requires as evidence either a document or the representation of a person with actual authority, in order to validate the third party assumption of compliance.
2. Where a third party is put 'on inquiry' by circumstances surrounding the transaction, he 'cannot presume in his own favour that things are rightly done if inquiry that he ought to make would tell him that they were wrongly done'. (Objective Question).
3. The indoor management rule is aimed to balance, on the one hand, to protect and promote business convenience, which would be at hazard if persons dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of officers and the validity of instruments; on the other hand, to avoid facilitating by overextensive application of the rule the commission of fraud and the unjust favouring of those who deal with companies at the expense of innocent creditor and shareholder victims. (At common law, fraud defeats the indoor management rule.)
4. A fair balance can be struck by holding that a person is put on inquiry when a company appears to gain no benefit, and where a transaction appears to be unrelated to the purposes of its business.
5. An Individual director has no usual authority to bind the company.

NORTHSIDE DEVELOPMENTS v REGISTRAR GENERAL

Facts: P McWilliam purports to enter contract on behalf of ADMAA (printing machine). Order form is signed P McWilliam, per B McWilliam There are two B McWilliams though: Snr was the chair, and Jnr was the MD.

Held: MD found in facts to lack actual authority: Constitutional limitation provided that actual authority could only be conferred by joint resolution of board. Jnr as MD did not have actual authority. Board could not be said to have represented P as authorized; Snr did not consent.

(Contract was held not to bind company).

CORPORATE CONTRACTING 9. Authority by construction.

Chair persons have no authority to bind the company.

STATE BANK OF VICTORIA V PARRY

CORPORATE CONTRACTING 10. Authority by construction.

A company secretary is not a mere clark and has ability to make small scale contracts as a usual matter.

PANORAMA DEVELOPMENTS; DONATA v LEGION CABS

CORPORATE CONTRACTING 11. Authority by construction.

1. Usual authority is a question of fact. The court will draw on evidence of commercial practice for what is usual.
2. s 180(1) does not mention 'skill'. However, the law requires financial competence and knowledge of the business as a base line in terms of skill.
3. Rogers CJ: 'The board of a large public corporation cannot manage the corporation's day to day business. That function must be left to executives.' They would expect to be informed of anything untoward or anything appropriate for consideration.
4. Non-Executive Directors are entitled to have confidence in Managing Directors.
5. The common law on delegation is reaffirmed (e.g. Re City Equitable Fire Insurance Company).

AWA Ltd v DANIELS

AWA had an employee E, who was trading on foreign exchange markets and causing them large losses. An inexperienced General Manager was not providing adequately supervising E. Non-executive directors relied unquestioningly on GM. Executive director Hook similarly relied.

Auditors had warned the GM, but had not warned the board. Company sues auditors in negligence. Auditor cross-claims against non-executives & Hook for contributing to or causing the company's loss.

CORPORATE CONTRACTING 12. Ostensible authority.

1. Diplock LJ's four conditions for ostensible authority:
a) Representation (to the contractor that the agent had authority to contract on behalf of the company)
b) Actual Authority (on part of representer/s to manage business generally or the specific contract matters: 'the making of such a representation is itself an act of management fo the company's business')
c) Inducement (such that the contractor relied upon the representation; hence, where the contractor knows of facts which suggest that the apparent agent did not have authority, they will not have relied on the representation)
d) The fourth no longer applies; but some commentators view that apparent authority will not operate if the third party knows something which would 'put a reasonable person on inquiry' as to a lack of authority. This is usually included in inducement considerations.

2. Allowing an executive to present themselves to others as if they had actual authority is sufficient for the purposes of the company/board making a representation.

FREEMAN & LOCKYER v BUCKERHURST PROPERTIES

Facts: Company with four directors. Mr C and H, and a nominee of each. Company acquired land for development. H and his nominee were taking no role in management. Mr C engaged plaintiff architects on behalf of company. C had no authority from board and had not been appointed as managing director (i.e no usual authority). Was the company bound by the engagement?

Resolution: Company bound to engagement. The board knew that C had been conducting affairs on his own. By allowing this to continue, board represented that C was managing director (i.e. had authority to enter into contracts that a managing director would in the normal course be authorized to enter into on behalf of the company)

CORPORATE CONTRACTING 13. Ex post facto rectification.


If company in liquidation, liquidator can ratify a contract.

ALEXANDER WARD v SAMYANG NAVIGATION

CORPORATE CONTRACTING 16. Statutory assumptions.

The statutory assumptions co-exist with the common law, and are read in light of the common law

Australian Capital Television v Minister for Transport and Communications

CORPORATE CONTRACTING 17. Statutory assumptions.

• (1) 'Dealings with the company' interpreted broadly
• (2) If the assumptions could not be made every time the relevant company officials acted outside their authority, then the statutory provisions would have little meaning. Purposive, protective reading.

STORY v ADVANCE BANK

CORPORATE CONTRACTING 18. Statutory assumptions.

1. De facto managing director (G) has actual authority; can represent by silence in the presence of a misrepresentation. (F was a secretary).
2. Where constitution stipulates a procedure for contracting, it must be followed, unless overridden by statute (e.g. s127(2)).
3. Statutory Assumptions operate independently; the failure of one does not preclude another.
4. (Brick & Pipe bound by contract).

Brick & Pipe Industries v Occidental Life Nominees

Guarantees given by 14 companies controlled by G (with F) for loan to S, G's company. No obvious benefit to Brick & Pipe to give such guarantee.
S defaults, new controllers of Brick & Pipe object to guarantee.

Claim no valid execution of seal due to lack of board resolution, and lack of witnesses.
Occidental's solicitor was familiar with the constitution, and queried whether F was actual secretary (not in records). Random D assured that F was.

Guarantee had not been validly executed; Occidental tried to rely on assumptions of board authorisation, F being a secretary by representation, and proper seal due to valid witness.

B & P responded variously, including that solicitor had notice that the use of the seal was unauthorized.

SEPARATE IDENTITY DOCTRINE 0.

• (1) Separate legal identity of companies established.
• (2) While legislation was intended to prevent individuals from distancing themselves from the liability of their own economic acts, the HoL could find nothing in what he did contrary to the legislation's letter.

SALOMON v SALOMON

Salomon controls company through wife and kids - sets himself up as a secured creditor. Unsecured creditor appears; business becomes insolvent. Appointed liquidator tries to sue Salomon for using a sham device to avoid paying debts. Argued agency. Accepted. CoA rejects - company was held on trust. HoL considers.

LIFTING THE VEIL 5.

1. There is no common, unifying principle, which underlies the occasional decision of courts to pierce the corporate veil. The common law for veil lifting is in a state of flux.
2. Mere agency is not sufficient for veil-lifting - otherwise all parents are liable for subsidiaries, and all shareholders for companies.
3. It is arguable that the veil will be lifted for torts - limited liability is mitigated by the possibility of contracting around it, but this is not the case for torts.
4. Torts against employees may feature ability to contract around risks - however, this may be artificial, and regardless, he has no real input in determining how the business will be conducted.
NOTE: this is a procedural decision. Only persuasive.

BRIGGS v JAMES HARDIE & CO

Late discovery of asbestos poisoning. Employee Briggs seeks extension of limitation period to join parent company to tort action - Court considered whether there was evidence to establish an arguable cause of action.

LIFTING THE VEIL 4. Statutory departures; insolvency; defences

For the statutory defence that director did not take part in management of company due to illness or 'other good reason', it is not enough simply to have merely left management to other directors.

DEPUTY COMMISSIONER OF TAXATION v CLARK

CIVIL & CRIMINAL LIABILITY 4.

1. Viscount Haldane's metaphor in Lennard's extended by Lord Denning to imply organic theory of corporation by way of analogy between company and human body.

H L Bolton (Engineering) Co v T J Graham & Son

LIFTING THE CORPORATE VEIL 13.

1. Insolvency awareness provisions require more than an idle wondering; must be a positive feeling of actual apprehension or mistrust, amounting to a slight opinion, but without sufficient evidence.

Queensland Bacon v Rees

MANDATORY RULES 1.

1. The words of the act 'a public company may remove a director from office despite anything in the company's constitution' was read to defeat provisions which would inhibit removal, but not to interfere with alternative removal mechanisms.
2. Contrast Scottish Colonial.

Allied Mining & Processing v Boldbow
WA

GM convened to displace directors by constitution, rather than by mandatory rule s203D.

MANDATORY RULES 2.

1. If a director is to be removed, the procedures of s203D must be taken. (Decision based on 'strong and unambiguous' language of s203D, and purposes of provision: to prevent entrenchment of directors while affording procedural fairness to directors under challenge).
2. Contrast Allied Mining

Scottish Colonial v Australian Power & Gas Co
NSW

Directors to be removed - by constitutional procedure or by s203D?

Managing Directors will not be able to act beyond the usual authority of managing directors of their standard.

Re Tummon Investments

DIRECTORS DUTIES: to whom owed

1. Director/officer duties are owed to the company as a separate legal entity. (Implies that they can only be enforced by the company.)

Percival v Wright

DIRECTORS DUTIES: to whom owed

1. Duties can be owed other directors and shareholders, where there is (a) shareholder dependency; (b) a relationship of trust and confidence (or position of advantage); and (c) a significant transaction and positive action taken by directors.
2. Trial: There was a personal dealing between G and G; this was not a case of G selling his shares on the market. (Warning: lecturer hate)
3. Appeal: A director can owe a duty to another director, as long as there is no conflict to the company.
4. Arguably, this principle would also arise in a shareholder buyout under CA s1322

Glavanics v Brunninghausen

G and B had 1/6s and 5/6s shares in a company respectively. B has the only active director on the board. G took no part in management. B did not disclose to G that he had been approached by third party with an offer to buy business. Meanwhile, G agreed to sell B his shares. As sole director and shareholder, B sold shares to third party for considerable profit.

DIRECTORS DUTIES: to whom owed

1. Directors' duties can be owed to third parties if responsibility is assumed.
2. What is required for a duty to arise on the facts is: shareholder dependency; relationship of trust and confidence (or position of advantage); significant transaction and positive action taken by the directors
3. Note, in Williams v Natural Life Health Foods, the court showed reluctance towards undermining separate legal personality and limited liability.

Peskin v Anderson

DIRECTORS' DUTIES: Statute; who owes them

(1) The broad definition of 'shadow director' allows a company to be regarded as such.
(2) Factors, per Hodgson J:
• Effective control: i.e. majority shareholding
• Management control: e.g. conditional funding, payments requiring approval, financial commitments requiring approval
• Willingness and ability to exercise control.
3. 'Incurred' in s588G requires a voluntary action on the part of directors.

Standard Chartered Bank of Australia v Antico

Pioneer owns 100% of shares in Ampol; Ampol owns 100% of shares in Korbell; Korbell owns 43% shares in Giant. Thusly, Pioneer has 42% of shares in Giant, which was in effect majority control (the rest of the shares were divided 10%, 6%, 6% and 3%). Pioneer puts three nominee directors on Giant's board.

DIRECTORS' DUTIES: Common law; who owes them;

1. At common law, directors' duties encompass anyone 'acting as a director'.
2. This includes persons who knowingly assume office of director without having been properly appointed

CAC v Drysdale

Directors' Duties: Common law; who owes them

Playing a role in fundraising & negotiating large contracts was sufficient to be acting as a director.

Grimaldi v Chameleon Mining

What constitutes 'acting' as a director?

Directors' Duties: Common law; duty of care

1. Arises both via common law and equity, but the duties in equity and law 'to exercise reasonable care and skill are, in content, the same'; 'a director's duty to exercise reasonable care, though equitable, is not fiduciary'.
(2. The classification of duty was either common law or equitable may be significant regarding causation or measure of compensation, where application of equitable rules may lead to different result than via common law negligence rules.)

Permanent Building Society v Wheeler

DIRECTORS DUTIES: common law duties;

1. The relevant directors' duties are:
(a) Care: the standard of care is such as a reasonable person in the defendant's position would take.
(b) Skill: the defendant is held to to a standard of care in accordance with there skill—what would a reasonable person with the knowledge and experience of the defendant have done in the circumstances if acting on his own behalf? Subjective test per Re Brazilian Rubber Plantations (i.e. if a director possess certain skills, he should use them for the benefit of the company), but arguably the modern trend is for requiring an objective standard per CBA v Friedrich.
(c) Diligence: Non-employee directors are not bound to give continued diligence
2. It is impossible to describe directors' duties in general terms. To ascertain the duties, must consider both nature of business, and the manner in which the work of the company is in fact distributed.
3. In respect of all duties that may properly delegated to another, if no suspicion, defendants justified in relying on that other. Delegation is essential for efficiency.
4. Rogers J accepted Romer's 'suspicion' test of delegation. The Appeal Court noted the test as creating a risk that directors would out of necessity make greater inquiries so as to remain un-liable. This lead to the statutory rules of delegation: CA ss 189-190.

Re City Equitable Fire Insurance, per Romer J

Managing director had been fraudulent and cased losses to company. MD in clear breach of fiduciary duty. However, what was the liability of the other directors for failing to stop MD carrying out fraud?

DIRECTORS' DUTIES: fiduciary duties; common law; defences

1. The directors of a company must act 'bona fide in what they consider—not what a court may consider—is in the interests of the company, and not for any collateral purpose. 2. Whence two separate fiduciary duties: (a) good faith in best interests of company; and (b) for a proper purpose.
3. Implies that court will not review the substance of business decisions (business judgement rule).

Re Smith v Fawcett

DIRECTORS' DUTIES: Common law; equity; defences

Rational for business judgment rule: More companies then courts, so not practical to review business decisions.

Carlen v Drury

DIRECTORS' DUTIES: fiduciary duty;

1. A fiduciary duty is imposed on directors by the analogy with trust/agent.

DIRECTORS' DUTIES: fiduciary duty; conflict rules

2. Rule 3: Directors must not misuse their position for their own or a third party's advantage except with the company's fully informed consent: Regal (Hastings) Ltd v Gulliver
3. Two part test: (a) What the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilization of their opportunities and special knowledge as directors; AND (b) What they did resulted in a profit to themselves.
4. No causation requirement: Liability does not depend on whether the plaintiff has been damaged or benefited by the defendant's action.

Regal (Hastings) Ltd. v Gulliver, per Lord Russell

R owned cinema, considering setting up corporate group: subsidiary that would purchase two extra cinemas. Required putting money into subsidiary, but R didn't have enough money. R was subsidised by its company directors. The group is sold to a third party, who caused R to sue former directors for breach of fiduciary duty for profiting from position (i.e. that directors found out about opportunity to buy shares in the subsidiary via their position).

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of the company'

1. Mixed subjective and objective test for good faith: Subjective considerations relate back to the question whether the directors honestly believed the transaction to be in the best interests of the company, not to whether it actually benefited the company.
(See also Hutton v West Cork Railway)
2. 'Interests of the company' includes creditors: It is a duty to consider, not necessarily give priority to, the interests of creditors

Bell Group v Westpac Banking, per Owen J

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of the company'

Directors must consider creditors interests where info that company faces real and not remote risk of insolvency.

Grove v Flavel

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of the company'

1. (In regard to ss 182-3), impropriety is judged objectively, such that improper intent or consciousness of impropriety is not a necessary component of the duty.
2. (In regard to ss 182-3), impropriety is not restricted to abuse of power - it may consist in doing an act that a director or officer knows or ought to know that they have no authority to do.

R v Byrnes

Stolen.

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'; corporate groups.

1. Regarding what is in the 'interests of the company', purely objective test whether directors did or did not address their minds to the interests of the company.
2. Preferred objective test with regard to corporate groups and 'interests of the company': It is not sufficient to strike down decisions on the basis that the directors involved in a corporate group failed to subjectively consider the interests of the separate entity. An objective test is preferable: would an intelligent and honest person in the position of the directors reasonable have believed that transaction was for the benefit of the separate entity?

Charterbridge v Lloyd Bank

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'

1. 'Interests of the company' includes creditors: Would an intelligent and honest person in the position of the directors have reasonably believed that the transaction was for the benefit of the company, bearing in mind the interests of the company's creditors?
(Seel also Kinsela v Russel Kinsela)

Linton v Telnet Pty Ltd

Keep: yes/no?

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'

1. 'Interests of the company' includes existing and future shareholders: 'Existing' includes minority members, and so a decision at their expense is a breach.

Ngurli Ltd v McCann

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'

1. 'Interests of the company' allows but does not necessarily include employees: A company may be generous to those whom it deals with if it is for the overall benefit of the company to do so.
(See also Hutton v West Cork Railway)

Woolworths v Kelly

CEO got a jet plane. There may be cakes, ale, and jet planes.

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'

1. 'Interests of the company' allows but does not necessarily include employees: the companies overall interests must be benefited.
(2. The company should be commended for wanting to benefit its employees in winding up, but the law does not allow the company to put its own interests second.)

Parke v Daily News

Company being wound up. Proposed to make gratuitous payment to employees who were going to loose jobs. Voluntary redundancy payment.

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'; nominees

A nominee director must act in the best interests of the company he directs rather than the best interests of his appointer.

Bennett's v Board of Fire Commrs of NSW

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'; nominees

Where the interests of their appointer and the company conflict, nominee directors must either prefer the company's interests or resign.

Scottish Co-op Wholesale Society v Meyer

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'; nominees

1. Nominee directors are bound to ignore directions from their nominators.
2. Nominators are not vicariously liable for the actions of their nominees.

Kuwait Asia Bank EC v National Mutual Life Nominees Ltd

DIRECTORS' DUTIES: fiduciary duty; good faith arm; 'interests of company'; corporate groups.

1. Obiter: Preferred mixed subjective/objective test with regard to corporate groups and 'interests of the company': A preferable view may be that where the directors have failed to consider the interests of their company they should be found to have committed a breach. If the transaction, objectively viewed, was in the interests of the company, then no consequences would flow from the breach.
2. Since director claimed didn't consider company's interests, objective test applied. Held, an intelligent and honest man would think that payment to U was for the benefit of E since the payment was directed on the basis that it would discharge the bank loan, meaning finance remained available to E in turn. (Relaxation of idea that each company in a group has its own interest.)

Equiticorp Finance v Bank of New Zealand

Directors of E caused E to make payment to U, whom it had significant shareholding in. U used payment to pay off bank loan. E went insolvent. Liquidator brought misfeasance proceedings against directors for not acting in E's interests by paying U.

DIRECTORS' DUTIES: fiduciary duty; proper purpose arm;

1. First time the duty to act for proper purpose was dissociated from the duty to act in good faith and in the best interests of the company - directors believed honestly that they acted in best interests of company, but purpose nonetheless improper.
2. Shareholders can exceptionally bring an action for director breach of fiduciary duty to act for proper purpose where their right not to have their voting interest diluted is compromised.
3. Obiter - creating sufficient number of shareholders to enable statutory powers to be exercised is a proper purpose.

Hogg v Cramphorn Ltd, per Buckley J

Company targeted for takeover. Board of target company heard that bid had been made to shareholders. Under s 198A power, caused target to issue shares to an employee trust, with board as trustees. Shareholder claimed improper purpose.

Held, directors had honest belief that establishing a trust would benefit the company and that avoiding the bidder would also benefit the company. However, on the facts, an essential element of the scheme was to ensure control of company by directors and their supporters. Such manipulation of voting balance improper.

DIRECTORS' DUTIES: fiduciary duty; proper purpose arm;

1. There are no precise rules about purpose.
2. Examine the substantial purpose for which the which the power was exercised.

Howard Smith Ltd v Ampol Petroleum Ltd, per Lord Wilberforce

DIRECTORS' DUTIES: fiduciary duty; proper purpose arm;

1. The purpose for which the power was used is a question of fact.

Advance Bank Australia Ltd v FAI Insurances Ltd

Directors conduct could not be sanctioned: material circulated was emotional and misleading, not informative.

DIRECTORS' DUTIES: fiduciary duty; proper purpose arm;

1. In regard to 'mixed' purposes, the court should look for the 'substantial object the accomplishment of which formed the real ground of the board's action'.

Mills v Mills, per Dixon J

DIRECTORS' DUTIES: fiduciary duty; proper purpose arm;

1. Courts will not invalidate a decision if they believe it had a legitimate commercial motivation.
2. There is no direct legal obligation to consider customers, community or environment; however, community consideration etc. is not incompatible with considering shareholder interests bona fide, and the facts of modern life often make such consideration appropriate.
3. 'Directors ought be allowed to consider who is seeking control and why. If they believe that there will be substantial damage to the company's interests if the company is taken over, then the exercise of their powers to defeat those seeking a majority will not necessarily be categorized as improper.' 4. Proper purpose for issuing share capital includes getting best agreement possible (while still in control) regarding exploitation of rights.

Teck Corp Ltd v Millar

CANADIAN

DIRECTORS' DUTIES: fiduciary duty; proper purpose arm;

1. Even with a governing director, other individual directors still bear responsibility for the acts of the board.
2. Whether a board acts for proper purpose or not may be ascertainable with the help of the company constitution.
3. Where mixed motives, court should ask whether the legitimate act would have taken place but for the presence of the improper purpose.
4. The exercise of a power for an ulterior or impermissible purpose is bad notwithstanding that the motives of the donee of the power in so exercising it are substantially altruistic.
5. Defeating the voting power of existing shareholders by creating a new majority is impermissible purpose.

Whitehouse v Carlton Hotel Pty Ltd

Stolen.

DIRECTORS' DUTIES: fiduciary duty; proper purpose arm;

1. The duty to exercise powers for proper purposes applies to all exercises of directors' discretions, not just to share issues.
2. Mahoney JA: If an improper purpose merely affects the timing of the implementation of a decision but not the decision itself, then decision not voidable.
3. Kirby P (in dissent): combined the 'substantial purpose' and 'but for' tests. His approach was followed in Kokotovich and PBS v Wheeler.
4. A shareholder can rely on s1324 to prevent unlawful dividends.

Darvall v North Sydney Brick and Tile Co

DIRECTORS' DUTIES: fiduciary duty; proper purpose arm;

Example of improper purposes: preventing shareholders from deciding the outcome of a takeover bid, retaining control of the company, diluting the value of another shareholder's interest.

Kokotovich Constructions Pty Ltd v Wallington

M acting as Governing Director, issues shares in order to dilute W's shareholding in K.

DIRECTORS' DUTIES: fiduciary duty; conflict rules

Conflict Rule 1: Directors must not have a personal interest (or engagement with a third party) that conflicts with their duty to the company, except with the company's full consent.

Woolworths Ltd v Kelly

DIRECTORS' DUTIES: fiduciary duty; conflict rules

1. The constitution can allow for disclosure to board rather than GM, however failure to comply with the constitution will make the contract voidable at the option of the company.
2. Disclosure obligations are intended to be strictly adhered to. Notice must be in sufficient detail for the board as a whole to understand the scope of the benefit and potential profit to the director.

Camelot Resources Ltd v McDonald

Stolen.

DIRECTORS' DUTIES: fiduciary duty; conflict rules

1. There is no rule against competing directorships.

London and Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd

DIRECTORS' DUTIES: fiduciary duty; conflict rules

1. A director's obligation to give the company impartial deliberation may make it untenable to remain as the director on the boards of two competing companies.

Fitzsimmons v R

DIRECTORS' DUTIES: fiduciary duty; conflict rules

1. Conflict Rule 2: Directors must not misappropriate the company's property for their own or a third party's benefit.
2. This implies that directors can't take renumeration unless authorized by law, general meeting, or constitution.

Mordecai v Mordecai

Directors closed down business improperly, damaging property.

DIRECTORS' DUTIES: fiduciary duty; conflict rules

1. No profit rule extends to opportunities (treated as property). Much crossover with lecturer's misappropriation of property rule.
2. Ratification of director misappropriation of company property amounts to forfeiting the interest and property of the minority of shareholders in favour of the majority, and that by votes of those who are interested in securing the property for themselves.

Cook v Deeks

Stolen.

Summary: Court treated contract that was not yet concluded as property of the company, whereby director was found to have damaged company's property.

3 directors (D1, D2, and H) and fourth director C. 3 directors negotiating contract with third party, based on previous contract (i.e. based on good will). 3 directors transferred benefit of contract that they controlled to exclusion of C, and took steps to keep C ignorant (deliberately designed to exclude and used influence and position to exclude the company's interest whose it was their first interests to protect). 3 directors then used control of GM to ratify this breach.

DIRECTORS' DUTIES: fiduciary duty; conflict rules

1. Strict liability for conflicting position rule.

Aberdeen Railway Company v Blaikie Bros

Railway company contracted to purchase chairs from partnership. Director was both a director of the railway company and a partner in the partnership.

DIRECTORS' DUTIES: fiduciary duty; conflict rules

1. Strict liability: A fiduciary's duty to account for profits does not depend on fraud or detriment to the beneficiary, but arises from the mere fact of profit having been made.

Keech v Sandford

DIRECTORS' DUTIES: fiduciary duty; conflict rules

1. Notwithstanding the trust's profit, breach of obligation to avoid conflicts of interest.
2. Allowances can be made where the fiduciary relied on his own skill/industry to make the profit.
3. Relaxation of the Regal test: Lord Upjohn in dissent: a fiduciary will be in breach if there is 'a real sensible possibility of conflict' between the fiduciary's personal interest and their duty to the beneficiary.
(Applied by Privy Council in QLD Minds Ltd v Hudson and by the High Court in Chan v Zacharia)

Boardman v Phipps

B obtained information was acting as solicitor to trustee, used to purchase shares in a company hat the trust was not able to purchase. He reorganised the company and made a profit for himself as well as the trust.

DIRECTORS' DUTIES: fiduciary duty; conflict rules

Allowances are possible even where fiduciary did not act honestly.

Warman International Ltd v Dwyer

DIRECTORS' DUTIES: fiduciary duty; conflict rules

1. 'It was only because it fell to his lot to negotiate the sale on behalf of his company that he was able to demand and obtain the sum. His fiduciary character was alike the occasion and the means of securing the profit for himself.'
2. GM can ratify general law breaches with fully informed consent.
(3. There was no full disclosure. T went to only chairman and made partial disclosure.)

Furs Ltd v Tomkies

T was MD of company, negotiating the sale of the company's business to third party. Tanning and dyeing business. T made limited disclosure to company's chairman that the third party would want to engage his services after the sale went through. Chairman said make best deal for yourself that you can. T signed contract, disclosed everything about tanning and dyeing in return for shares, employment, etc. Would have made company's IP worthless.

DIRECTORS' DUTIES: fiduciary duty; conflict rules

1. Relaxation of Regal with regard to causation: May be arguable that liability will not arise where the fiduciary gets interests that are plainly personal are not conflicting with fiduciary duty.

Chan v Zacharia, per Deane J

DIRECTORS' DUTIES: fiduciary duty; conflict rules

1. Relaxation of Regal with regard to causation: No breach of a fiduciary obligation until a loss is caused.

Gemstone Corporation of Australia Ltd v Grasso, per Prior J

DIRECTORS' DUTIES: fiduciary duty; conflict rules; effect of resignation

1. When one looks at the way the cases have gone over the centuries it is plain that the question whether or not the benefit would have been obtained but for the breach of trust has always been treated as irrelevant.
2. There is a duty to disclose all information that comes to persons while managing directors that is of concern to the company - concealment of personal offer to personal advantage is thus a breach.
(3. Breach)

ICD v Cooley

Stolen.

Company bidding for contract, but only 10% chance of winning. Director released from service company, resignation prompted by what he found out in course of employment. Director went to knew company to pursue the contract.

DIRECTORS' DUTIES: fiduciary duty; conflict rules; effect of resignation

1. Regal's test of profits arising 'by reason of and in the course of' the fiduciary relationship is sufficient but not a necessary requirement - a duty would survive resignation where the resignation may fairly be said to be prompted or influenced by a wish to acquire for himself the opportunity sought by the company'.

Canadian Aero Service v O'Malley

Stolen.

DIRECTORS' DUTIES: fiduciary duty; conflict rules;

1. Allowances may be made for efforts of fiduciary.
2. S owns new business on constructive trust for Natural Extracts. Fact that business acquired in breach of fiduciary duty, perhaps as a result of fiduciary's skill, provides no defence to constructive trust.

Natural Extracts Pty Ltd v Stotter

S wanted to form company to grow plants in NSW. S owned property in NSW. S gave company opportunity to purchase. S then resigned as director to pursue other interests. S had already been planning to pursue tea tree project with Leary.

DIRECTORS' DUTIES: statutory duties; extending and increasing duties

1. Determining what constitutes reasonable care must regard the type of the company, the size of the company, and the distribution of functions within the company.
2.The responsibilities of a director include "arrangements flowing from the experience and skills that the director brought to his or her office, and also any arrangement within the board or between the director and executive management affecting the work that the director would be expected to carry out. The precise duty of care flowing from these arrangements would be subject, of course, to a minimum standard of care and diligence set by the statute in reflection of the common law position"
3. Reference to 'rational belief' in s 180(2) means based on an identifiable chain of reasoning, whether or not reasonable in a common law/objective sense
4. The common law rule is not entirely displaced by s 180.
5. Non-executive directors may find that if they have particular skills, they may be held to a higher standard, especially if it relates to the how/why of him being brought in,
6. Non-Executive chairman also the chair of its audit committee; held to a higher standard of care.

ASIC v Rich

Guy was chairman director of One.Tel. He was also chairman of One.Tel's finance and audit committee, the most financially qualified of the directors as a chartered accountant, and had been either the chief financial officer of the finance director at other large and similar companies. He argued that he had no special duties greater than that of the other directors and that reference to his responsibilities in CA s180(1)(b) related only to specific tasks delegated to him via constitution or resolution.

DIRECTORS' DUTIES: statutory duties


1. Court of Appeal: messed with Roger CJ's distinction between non-executive and executives by referring to what they the board ought to know: 'the responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company.' This lead to the deployment of CA ss189-190 with regard to delegation.
2. Rogers CJ's distinction, nevertheless, has been accepted and endorsed by other Australian jurisdictions: Biala v Mallina and Vrisakis v ASC.
3. The duty of care, skill and diligence exists in common law, thus tort principles apply (such as contribution).
4. A director:
a) has a continuing obligation to understand the company's business and keep informed about its activities.
b) need not undertake detailed inspection of day to day activities but must generally monitor corporate affairs and policies.
c) should maintain familiarity with the financial status of the company by regularly reviewing the financial statements
d) must make inquiry into matters revealed in the financial statements that call for inquiry.

Daniels v Anderson

Stolen.

AWA had an employee E, who was trading on foreign exchange markets and causing them large losses. An inexperienced General Manager was not providing adequately supervising E. Non-executive directors relied unquestioningly on GM. Executive director Hook similarly relied.

Auditors had warned the GM, but had not warned the board. Company sues auditors in negligence. Auditor cross-claims against non-executives & Hook for contributing to or causing the company's loss.

DIRECTORS' DUTIES: statutory duties

1. Standard of care for executive directors under s180 is objective. Minimum standard of skill with respect to financial status may be revised by employment contract.
2. The general law of torts may be called in aid as a source of guiding principles fo the content of the statutory standard of care of company directors and officers.
3. Circumstances may place a proactive duty to monitor claims made in advice; failure to go behind received advice can contravene the statutory duty.

ASIC v Vines

Stolen.

DIRECTORS' DUTIES: statutory duties

1. Failing to disclose the specifics of a decision is not a business judgment, but can nevertheless be a decision in breach of the ASX listing rules.

ASIC v Forteskew Metals Group

Director failed to make proper disclosures per ASX Listing rules.

DIRECTORS' DUTIES: statutory duties

1. Evidence is cumulative and essential as to whether the defendant rationally believed that a business judgement was in the best interests of the corporation.
2. "The law has not yet established the extent to which the position of a non-executive director shapes the content of the duty of care."
3. Obiter dicta: if the press released had in fact gone before the board (there was an unsatisfied question of whether it had), then because the decision was of such high importance to the company, a duty of care required non-executives to address their minds to the press reliance. Reliance on those further down the chain of command would not have been reasonable.

ASIC v MacDonald (No 11)

Board of James Hardie approved press release saying that compensation fund was full when it wasn't. They were relying on expert finance people who forecasted the fund would be sufficient to meet liabilities. Question of negligence in delegation.

DIRECTORS' DUTIES: statutory duties

1. Certain affairs cannot be delegated; they can only be discharged by the board. Important matters create a duty that requires non-executives to make their own, non-delegated judgment.

Morley & Ors v ASIC

Stolen.

Appeal from ASIC v Macdonald, overturns on facts.

DIRECTORS' DUTIES: statutory duties

1. The disqualification powers under ss206C and E should not be read as permitting a qualified order, restricting the disqualification to involvement in public companies - the provisions are meant to protect consumers and creditors as well as shareholders and investors.
2. s 180(1) does not mention 'skill'. However, the court noted that directors are expected to be familiar with the fundamentals of business and to keep themselves informed with the company's doings.
3. In regard to s 180(3), 'business judgment' would not extend to not thinking about it at all.
4. The burden of proof with regard to 'business judgement' is on the defendant
5. In regard to delegation under s 190, assimilated the statutory test for 'reasonable grounds' with the test applied at general law. Following factors relevant:
(a) The function that has been delegated is such that 'it may properly be left to such officers': Re City Fire Equitable Insurance, per Romer J
(b) The extent to which the director is put on inquiry or should have been put on inquiry: Re Property Force Consultants, per Derrington J
(c) The relationship between the director and delegate must be such that the director honestly holds the belief that the delegate is trustworthy, competent, and reliable - knowledge that the delegate is otherwise makes reliance unreasonable: Dempster & Biala Pty Ltd v Mallina Holdings Ltd
(d) The risk involved in the transaction and the nature of the transaction: Permanent Building Society v Wheeler
(e) The extent of steps taken by the director to establish trust.
(f) Whether the director is executive or non-executive: Permanent Building Society v Wheeler, per Ipp J. (Note: move away from this distinction in Daniels v Anderson.)

FINANCIAL ASSISTANCE: post-1998
6. Financial assistance under s260A interpreted to require impoverishment, rather than mere purpose.

Re HIH Insurance (in prov liq); ASIC v Adler

ASIC seeks disqualification of Adler; Adler argues that the disqualification order should relate only to public companies, allowing him to remain involved in his private interests.

DIRECTORS' DUTIES: statutory duties; extending and increasing duties

1. Held, directors liable for delegate. Executive directors shouldn't delegate to incompetent persons.

Dorchester Finance v Stebbings


Two directors were chartered accountants. They left an unqualified person unsupervised, and signed blank cheques for him to use.

DIRECTORS' DUTIES: statutory duties; extending and increasing duties

Where a non-executive voluntarily assumes higher duties, they are to be held to them.

Reesackas v ASC

DIRECTORS' DUTIES: statutory duties; extending and increasing duties

1. Daniels' minimum standard of financial competence cannot be decreased by reference to the individual circumstances of the director.
2. (But remember: the expectation of skill can be increased).

Gamble v Hoffman

The director argued that the court should reduce his culpability because he left school at 14 and had worked as a gardener ever since.

DIRECTORS' DUTIES: statutory duties; extending and increasing duties

1. Standard of Care may be more demanding depending on non-executive directors' skills.

Vrisakis v ASC

Stolen.

DIRECTORS' DUTIES: statutory duties;

With regard to ss 182-3, there is no need that a gain actually be made or a loss caused to the company.

Chew v R

DIRECTORS' DUTIES: statutory duties;

Shares used for controlling company votes was a breach under ss 182-3.

ASIC v Australian Investors Forum

DIRECTORS' DUTIES: statutory duties; ratification

1. Civil penalty proceeding involve public rights: the rationale for civil penalties is to take away opportunities to commit offenses. The shareholders cannot remove the declaration of convention by ratifying the original acts.
2. The court can take ratification into account with regard to s 1317 (evidence of honesty).

Forge v ASIC

MINORITY PROTECTION: derivative action; 'good faith'

The fact that a derivative action applicant is unlikely to benefit financially from a successful action is irrelevant to his bona fides; he may have motives that go beyond mere personal gain (sense of responsibility to creditors).

Charlton v Baber

Stolen.

MINORITY PROTECTION: derivative action; 'good faith'

1. Statutory derivative action suitable means of resolving an allegation by one shareholder that another had caused the company loss, and where the court did not attempt to quantify the 'cost benefit' of the proceedings in financial terms.
2. Overlap between other proceedings, or appropriateness of alternative must be complete to indicate a lack of good faith or contrariness to best interests of company.

Fiduciary Ltd and Others v Morningstar Research Ltd and Others

MINORITY PROTECTION: derivative action; 'good faith'

1. Good faith can be absent where conduct falls short of abuse of process, but applicant nevertheless seeks to further own interests instead of company as a whole. A creditor-member who brings a derivative action solely to see their debt repaid is not acting in good faith.
2. A shareholder seeking a derivative action against self-interest is a good prima facie sign of their acting in good faith.
3. The derivative action is intended to apply only to a company as a going concern and not one under the control of a liquidator.

Chawan v Euphoric Pty Ltd

MINORITY PROTECTION: derivative action; 'good faith'

1. CA derivative action using words 'serious action to be tried' is intended to direct the kind of inquiry undertaken by a court on an application for an interlocutory injunction. (Explained further in Chahwan v Euphoric): It is not the function of the court to probe in depth the issue of serious question to be tried. The process is essentially a screening process designed to exclude cases with insufficient prospects of success to warrant the proceedings being pursued.

Goozee v Graphic World Group Holdings Py Ltd

MINORITY PROTECTION: derivative action; 'good faith'

1. Good faith has two factors: honest belief in a good cause of action with a reasonable prospect of success, and whether the applicant seeks the derivative action for such a collateral purpose as would amount to an abuse of process.
2. The court should grant leave for a derivative action if the applicant would suffer real or substantial injury.
3. Onus to demonstrate compliance with CA derivative action requirements is on the plaintiff.

Swansson v RA Pratt Properties Pty Ltd

MINORITY PROTECTION: s 1324 injunction.

With regard to s 1324(1A) 'Interests' are of any person, inc. a corporation, that go beyond mere interest of member of public. Not necessary to show personal rights affected (i.e. s 140 rights), nor necessary to show that any special injury as occurred.

Broken Hill Pty Co Ltd v Bell Resources Ltd

MINORITY PROTECTION: s 1324 injunction.

Authority for the principle of majority rule; the company is the proper plaintiff for a wrong done to the company.

Foss v Harbottle

MINORITY PROTECTION: s 1324 injunction.

1. Need to follow precedent such as Premier Gold NL v Ocean Resources, which gives claimant a day in court, but if the plaintiff trying to usurp the role of the board, discretion should deny the remedy.
2.. Obiter: Legislature did not intended every minor breach to be actionable, because this would undermine the role of Foss v Harbottle.
3. Obiter: s 1324 should not apply to breaches of s 181.

Mesenberg v Cord Industrial Recruiters Pty Ltd, per Young J

MINORITY PROTECTION: s 1324 injunction.

1. Court endorses approach of embracing the wide standing of the CA Injunction, but becoming very careful in actually granting the injunction (to prevent the members from usurping the management power).

Premier Gold NL v Ocean Resources NL

MINORITY PROTECTION: s 1324 injunction.

Any concern that shareholders or creditors should not be allowed to interrupt the proper running of a corporation through litigation could be controlled by the courts' discretion under the provision.

Airpeak Pty Ltd v Jetstream Aircraft Ltd

MINORITY PROTECTION: s 1324 injunction.

Successful action by shareholder for breach of directors' duties, but not directors duty to company—fiduciary duty towards individual shareholders.

Idameneo Pty Ltd v Symbion Health Ltd

MINORITY PROTECTION: members' personal action

If every provision in the company's constitution were a contractual right vested in each member the rule in Foss v Harbottle would disintegrate. The rule implies court non-interference. Despite the difficulty of distinguishing between individual and representative rights (see Kraus v JG Lloyd), the rule for the most part prevails.

Stanham v National Trust of Australia

MINORITY PROTECTION: s 140 members' personal action

1. Advocated pragmatic in deciding whether there is a membership right, personal right, or corporate right. Companies cover a whole spectrum of organisations. Company law needs scope and flexibility to reflect differences such as these.
2. A member qua member has rights which are either (1) personal rights covering the incidents of his shares, or (2) constitutional rights to have the company function properly in accordance with the basic statutory scheme. Any other rights are not within [s140] and must be the subject of an extrinsic contract.

Norths Ltd v McCaughan Dyson Capel Cure Ltd, per Young J

MINORITY PROTECTION: s 140 members' personal action

Concerned a provision of the articles about the conduct of meetings. Held, no personal right to have a poll taken; no personal rights arise out of mere procedural irregularities

MacDougall v Gardiner

MINORITY PROTECTION: s 140 members' personal action

The pragmatic approach advocated in Norths may elevate personal rights such to attach to mere procedural irregularities.

Ryan v South Sydney Junior Rugby League Club Ltd

MINORITY PROTECTION: s 140 members' personal action; diminishment of share value

Loss of value of shares is merely reflective of loss recoverable by the company. If you allowed shareholders to sue, that would create a risk of double recovery. Properly, directors cause company to sue person who harmed company. Money will come back to company. Shares will rise in value.

Prudential Assurance Co Ltd v Newman Industries (No 2)

MINORITY PROTECTION: s 140 members' personal action; diminishment of share value

Arguable exception to Prudential Assurance where (a) the company has no cause of action or (b) the claim is based on a duty owed directly to the shareholder (i.e. the shareholder suffers a loss separate and distinct from that suffered by the, caused by a breach of a duty independently owed to the shareholder).

Johnson v Gore-Wood

MINORITY PROTECTION: s 140 members' personal action;

1. Particular circumstances of a case may give rise to directors owing a fiduciary duty to individual shareholders. Factors that created it here:
- family character of the company,
- position of directors in company and family,
- high degree of inside knowledge,
- the way they went about persuading the shareholders to sell (dishonestly).

Coleman v Myers

Stolen.

Myers did not disclose facts of deal to shareholders, represented that the offer price reflected true value of the shares. Proceedings brought for breach of fiduciary duty owed by them to the shareholders

MINORITY PROTECTION: general law action for fraud on the minority;

1. The shareholders are not trustees for one another, and, unlike directors, they occupy no fiduciary position and are under no fiduciary duties. They vote in respect of their shares, which are property, and the right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owner's personal advantage.
2. Fraud on the minority is "a means of securing some personal or particular gain, whether pecuniary or otherwise, which does not fairly arise out of the subjects dealt with by the power and is outside and even inconsistent with the contemplated objects of the power."

Peter's American Delicacy Co Ltd v Health, per Dixon J.

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